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Effective Strategies to Avoid Real Estate Claims in Texas

If you’re a real estate professional, you know it’s important to manage risk and the threat of potential litigation in your business. No one knows this better than Tom O’Connell, who’s been defending real estate professionals in errors and omissions claims statewide in Texas for more than 30 years. Tom is an approved Texas panel counsel for numerous insurance carriers. He has experience in defending claims of negligence right through to fraud and deceptive trade practice lawsuits.

You can watch the webinar (see the screen below) or check out the summary . . .

Top tips for real estate agents to avoid litigation in Texas

Disclose, disclose, disclose

It’s much better to disclose now, rather than face litigation and potentially lose your business in the future. Disclosures are very specific in the state of Texas, and if you or your seller are aware of any “known defects” or prior issues with a property, these must be disclosed.

  • I’m estimating that three out of every four Errors & Omissions lawsuits involve an allegation that the agent failed to disclose a material defect
  • If you’re asking yourself if the condition is something that should be disclosed, then you should disclose it. This is much more important than worrying about scaring off potential buyers.
  • If your seller doesn’t want to disclose a possible problem, you should walk away from the listing. You now have knowledge of the problem and must disclose it if you take the listing.

Example:  Your listing under contract has an inspection that reveals potential foundation problems, but that deal falls through.  A second buyer has a structural engineer inspect the property and he finds no problems.  You might believe the engineer’s report is more accurate, but you must disclose the prior report which can be considered a material fact.

Document everything

Keep a transaction log and document everything in the file.  That means:

  • Date each entry in your transaction log. Always enter the information in chronological order at the time of occurrence. 
  • Document every meaningful conversation. Discuss what occurred in phone conversations or in-person meetings.
  • Keep all communications with clients on file — emails, written correspondence, and notes about phone conversations.
  • Record important occurrences such as inspection reports. And each time you provide any report, have the client SIGN OFF on it!
  • Ensure your clients provide you with instructions and their decisions in written form to protect yourself and your business.

Having this written documentation can sway a jury in your favor.

Example:  Your sellers advise they need you to help them fill out the seller’s disclosure form.  You should advise your clients that you can help them, but the clients must complete the form. Then you should immediately enter into your transaction log in chronological order the date and narrative of what occurred.

Stick with what you know

Don’t agree to be involved in transactions beyond your expertise or in an unfamiliar geographical area. Certain types of transactions require special expertise (such as commercial transactions) and certain geographical areas may have requirements or characteristics that you may be unfamiliar with.

You are a real estate expert, not an accountant, tax attorney, financial planner, builder or plumber.  Make sure any advice you provide to your client is within your scope to reduce your risk of liability and lawsuits.

Example:  A residential real estate agent is asked to assist a client in purchasing a small commercial office building.  Other agents in the office have expertise in commercial real estate.  Be sure you enlist the aid of a qualified agent in the office to assist you in the transaction, to ensure the normal steps an experienced commercial real estate agent knows to take are followed. 

Ensure you have real estate E&O Insurance

Errors & Omissions Insurance can protect you from a range of risks you face every day in your real estate business, from breach of contract and misrepresentation to closing disputes and negligence.

  • “But carrying E&O makes me a target for litigation . . .” Not true.  The opposing attorney typically doesn’t discover there’s no E&O coverage until well into the discovery process – after a lawsuit is already filed.  And without E&O insurance, you’ll pay for your own attorney.  If you attempt to go it alone without legal counsel, you run a much higher risk of having a judgment entered against you.

E&O insurance can also help you keep your real estate license.  If you don’t have E&O and you have a judgment against you, the opposing attorney may collect from the Real Estate Recovery Fund. It’s highly likely that your license will be suspended as a result.

Always notify your E&O carrier of claims – and potential claims

Always notify your insurer (and your office rep) in a timely manner if an incident (POTENTIAL CLAIM) or claim does occur. Otherwise, you could end up with NO COVERAGE, even if your company has an E&O policy in place.

  • Any demands for money, or any subpoena for documents or to testify, should be reported to your carrier. Whenever you have knowledge of any incident that may give rise to request for damages, you should report it.
  • If you are subpoenaed to testify in a deposition, you should ALWAYS have the advantage of legal counsel – even if you’re not named in the lawsuit. You run a higher risk of being brought into a lawsuit afterwards.

Example:  You assist a buyer in a purchase.  Later, you receive a demand letter threating to sue you because of an undisclosed defect, and demanding $5,000 to get the problem fixed.  You call your buyer, who tells you he’s since calmed down, knows you didn’t do anything wrong, and to disregard the letter.  But this is a potential claim.  If you don’t report it and advise your office rep, the E&O renewal application could be completed without disclosing the potential claim.  Later if the potential claim becomes a lawsuit, your E&O carrier will deny coverage because the claim wasn’t disclosed in the renewal application.

Limit your liability from information from other sources

Another area of risk is information you provide to your clients from other sources. Encourage  your clients to go straight to the source for information. For example crime statistics can usually be gathered from the police, and neighborhood data from the local city council office. If you do provide any information from other sources in your marketing, ensure you clearly state the source of that information. Adding a disclaimer is also good practice to protect yourself from future liabilities.

  • If you use information from other sources about the character condition of the property and it’s not accurate, you may be liable for damages.
  • Never say “property is in mint condition or excellent condition.” You don’t really know what condition the property is in, unless you’re the actual seller.

Example:  Your seller client advises you the property is 5500 square feet.  Have the seller sign off on this information in writing.  Have the seller initial the flyer, ad, or whatever you’ve created and keep that in your records.

Without knowing whether it’s correct, you’ll be advertising that feature, which a potential buyer relies on. You should always provide notice in writing to the buyer as to where the information came from.  Say, “5500 square feet per owner” or “Zoned for 2 horses per seller.”

Want to know more about how you can protect your real estate business from litigation in Texas?

Watch the webinar replay below:

*Clips & References
“He just died last night” video clip. Adam Mckay, Jon Brion, Hal Willner & Bruce Fowler, R. G. (2008) STEP BROTHERS. USA.

If you are a firm or firm + agents in need of coverage, click here.

If you are an individual agent looking for personal coverage, click here.

Or call CRES on 800.880.2747 to speak with one of our friendly team who can customize an E&O policy tailored specifically to your real estate business.

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